Fall in jobless figures boosts recovery hopes

British employers claim to have created 115,000 new jobs between July and September, the largest boost to employment for five-and-a-half-years, Government statisticians said yesterday.

The new jobs helped push unemployment below 2.5 million last month and raised hopes that economic recovery might at last rekindle the elusive "feel-good factor".

The number claiming benefit dropped by 43,400 in November, after adjusting for the small rise which is normal for the time of year. This took the jobless total to a three-year low of 2,470,600, more than half a million down from its peak. Unemployment has been falling steadily since the end of 1992, but in all but three months since then employers have reported that they were still shedding jobs.

Unemployment has fallen by an average of more than 30,000 a month over the last six months, the most rapid rate of decline since 1989.

But Michael Portillo, Secretary of State for Employment, stuck by the assessment he made last month that it would be over optimistic to claim that such a fast decline would be sustained.

The figures prompted several City economists to predict another rise in interest rates early next year, arguing that they were evidence that the economy was still growing too quickly for comfort. Higher base rates would raise borrowing costs for businesses and mortgage holders, dealing a fresh blow to the housing market.

Fears of a further rate rise were also fuelled by figures showing that the Government's target measure of underlying inflation - which excludes mortgage interest payments - had risen from 2 per cent in October to 2.3 per cent in November. This was the biggest one-month jump in four years and means that underlying inflation is already overshooting the unpublished forecast produced by the Treasury in the run-up to the Budget. The headline rate of inflation rose from 2.4 to 2.6 per cent.

Kenneth Clarke told the House of Commons Treasury select committee that yesterday's figures provided further justification for last week's half-point rise in interest rates.

The Chancellor challenged the conventional wisdom that the economy could only grow by 2 to 2.5 per cent a year without putting upward pressure on inflation.

He argued that there was still spare capacity and that Government measures to make the economy run more efficiently should allow quicker growth.

He added: "But in the light of experience I have no intention of making the happy assumption that we can continue to run ahead of that."

Mr Clarke said the Government's defeat in the vote over VAT on fuel provided further justification for an interest rate rise which had been necessary because of the state of the economy and he conceded his instinctive desire to broaden the range of goodson which VAT was imposed had been derailed.